Executive Shirt Company, Inc

Executive Shirt Company, Inc

Question 2

Both Mike and Ike have taken unique approaches to solving the problem of effectively implementing a custom shirt line to the production process. There are positives and negatives to each course of action, but overall, Mike’s plan will help Dwight Collier more effectively accomplish his vision. There are several reasons why Mike’s plan is more effective:

• Direct labor costs under Mike’s plan fall from $3.84 to $3.47 per shirt. This fact means that Mike’s plan will not only decrease the overall direct labor costs per shirt, but that each shirt produced (on average) will bring a higher margin and more gross profit. Alternatively, the weighted average direct labor cost for Ike’s plan is $3.90, because there is a lower utilization rate on the separate custom shirt line. This would increase labor costs per shirt 12.5% while keeping production constant. With current production, labor costs are about 27% of manufacturing costs, and Mike’s plan will help decrease that percentage for each shirt sold.

• Direct labor utilization is incredibly low for Ike’s custom shirt line. While the capacity of the line will be able to produce the target 2,000 shirts per day, utilization is 34%. While the weighted average for the utilization rate under Ike’s plan is 81%, it requires paying workers overtime on the regular shirt line, and could lead to complaints about working conditions. Mike’s utilization rate is lower at 74%, but is still an improvement over the current system. In addition, Mike’s capacity utilization is 94%, which is a vast improvement over the current system. This problem could also be remedied by hiring an additional staff member to sew cuffs.

• Under Mike’s plan, lead time is cut from 12.25 to 2.06 days overall. Ike’s plan has an increase in lead time for regular shirts (12.58 days), but Ike is also able to offer a lead time of just 0.41 days on custom shirts. Both of these plans will meet Dwight’s requirements of 5 days, so reducing the lead time below 2.06 days leads to diminishing returns. Ike’s plan will have an overall weighted average lead time that is larger than Mike’s.